How investors in Singapore can embrace the power of dividends

Every investor should own dividend-paying assets – and the Singapore stock market represents a great opportunity to do that right now. (We've put together a free special report that goes into more detail about why the Singapore stock market is particularly attractive… click here to download it now.)

Stocks that pay dividends are a great long-term investment. They're an easy, effective way to grow your wealth. And over long periods, high-quality dividend stocks tend to outperform the broader stock market.

The magic of compounding is one of the great under-appreciated secrets of building wealth. Reinvesting dividends back into the same stock, and then earning more dividends, can turbo-charge returns.

This is what compounding does: Imagine you invest $10,000 in a stock with a 5% dividend. In year one, you would receive $500 in dividends. But, if you reinvest the dividends you have $10,500 earning 5%, instead of just $10,000. Then if you did the same thing the following year you would have $11,025 earning 5%. The next year it would be $11,576 then $12,155, and so forth.

Just by reinvesting the dividends, by year five your initial $10,000 investment would grow to $12,763, and $16,289 by year 10 and $26,533 by year 20. That's over $6,000 more than if the dividends were not reinvested, as shown above. Now imagine if you had invested $100,000 and you can see how dividends create wealth – that $100,000 would be worth over $160,000 in ten years just from reinvesting the dividends.

Reinvesting dividends leads to better investment returns than if the income is not allowed to compound. And if a company's stock price is growing, and the dividends are reinvested, you have a combination of share price gains and compounding dividends that is tough to beat.

To illustrate, consider an investor who put his money in the S&P 500 in 1970. The average dividend yield for the S&P 500 from 1970 until the end of 2015 was about 3%. If he invested in the S&P 500 over that time period without any dividend reinvestment, he would have received a 2,098% return (roughly 7% per year).

But, if he reinvested the dividends, he would have posted a return of 8,762% (slightly more than 10% per year). Compounding the extra 3% makes a huge difference.

The situation is similar for the MSCI Asia ex Japan Index. Since 1988, the index has had a return of 400%. But with dividend reinvestment, the return jumps to 758% – nearly double the return without dividend reinvestment. The average yield for the MSCI Asia ex Japan index has been 2.5% since 1995, which is the farthest back the dividend yield has been reported.

And that brings us to the situation in Singapore. The overall Singapore stock market currently offers one of its highest dividend yields ever. This not only signals the market is undervalued, but it's a great opportunity for investors looking to harness the power of compounding.

The dividend yield for Singapore's stock market is currently at about 3.5%. The historical average dividend yield is around 2.7%. In other words, the yield is 30% higher than average. And this is the third-highest dividend yield that the Singapore stock market has seen in 30 years.

Further, every time the dividend yield for the Singapore market has been above 3% (marked by the solid horizontal red line in the chart below), the market has climbed an average of more than 100 percent over the 17 months that followed.

The point? Every investor should have some dividend-paying investments in their portfolio. And right now is a great opportunity to earn historically high dividends in the Singapore stock market.

To take advantage of this opportunity, look at the SPDR Straits Times Index ETF. This ETF allows you to own all the shares in the Straits Times Index (and earn dividends) with one purchase. It trades on the Singapore exchange under code ES3.

We see a number of other reasons for why the Singapore stock market looks compelling right now. We discuss these in a free special report that you can download by clicking here.

And sign up below to receive the Truewealth Asian Investment Daily, a free e-letter that brings you independent insight on investing in Asia that will save you time and make you money...